2.8 The Philipps Curve

Question 1

what is the Philipps curve?

Answer 1

Economic model that demonstrates the trade off between inflation and unemployment

Question 2

explain the concept of the Phillips curve

Answer 2

if govt cuts unemployment through expansions fiscal or monetary policy, the resulting shift in AD curve will increase output, which can only be achieved by employing more labour.

this excess demand for labour means wage rates have to rise to attract new workers which I turn causes inflation to increase. this can be shown by AD curve shifting to the right, along the AS curve, closing the output gap and nearing the full employment level of output.

conversely rate of inflation will fall as unemployment rises due to weak demand.

Question 3

what is stagflation ?

Answer 3

simultaneously rising rates of inflation and unemployment

Question 4

draw a diagram to show the short run and long run Phillips curves

Answer 4

see diagrams sheet

Question 5

what is the natural rate of unemployment ?

Answer 5

proportion of workers who are voluntarily unemployed when the labour market is in equilibrium

Question 6

what is the non-accelerating inflation rate of unemployment ?

Answer 6

rate of unemployment consistent with a constant rate of inflation

Question 7

is the Philipps curve useful?

Answer 7

helps provide guide for politicians for how much inflation to expect
could also see how much unemployment to expect
however when stagflation occurred in 1960’s usefulness reduced and highlighted reality of the cost of controlling inflation

Question 8

wha are the key factors that explain the improved trade-off?

Answer 8

labour market flexibility 
immigration 
setting credible inflation targets 
low global inflation rates 
technological change and innovation